Optimal Sequencing and Resource Allocation in Research and Development Projects

The main purpose of this study is to construct a suitable research and development (R&D) model which would facilitate the analysis of activity sequencing and resource allocation in R&D projects. In the proposed model, essential characteristics of R&D projects are incorporated. Namely, the activities and the technological specifications of the project are selected dynamically, and the stopping time of the R&D process is introduced as a decision variable to be determined endogeneously. We characterize the collection of optimal sequencing of R&D activities that would maximize the expected net present value of the project, and we evaluate the possibility of incorporating various learning aspects into the model. We further analyze a resource allocation problem associated with the R&D model. It is shown that in certain cases one can efficiently implement a greedy-optimal resource allocation procedure for increasing the expected net present value of the R&D project.